Cyclical and structural factors are playing out in declining workforce participation rates.
Labour force participation has been falling in recent years, having been on a structural upward trend until late 2010.
The labour market is soft, and while the fall in the participation rate is, to a degree, restraining the increase in unemployment figures, unemployment is trending higher and job vacancies are low.
Currently, the biggest single influence on the participation rate is the ageing of the population. This is a structural issue. With an increase in longevity, there has been a consequent rise in the number of persons aged 65-plus as a share of the working-age population. And while the rate of increase has accelerated in recent years, the 65-plus cohort has a much lower participation rate.
Unless there is an offsetting increase in the participation rate of other age cohorts, the aggregate participation rate will naturally fall as the proportion of people 65 and over to the population as a whole rises. They are neither working nor looking for work – they are retired.
Until recently, an increase in the participation rate of people aged 55-plus in the workforce meant that the aggregate participation rate was trending higher. It more than offset an increase in the number of people aged 65-plus as a share of the working-age population.
The 55-plus cohort stayed in the workforce due to better healthcare and a structural shift in the composition of employment towards less manual-intensive labour.
But it looks like most of that structural lift in the part rate of the 'older' cohorts has now been exhausted. And in the past year, the participation rate of 60-64 year olds has actually decreased.
There has also been a noticeable decrease in the participation rate of younger people in recent years.
During the past five years, the participation rate of those aged 15-19, and to a lesser extent 20-24), has trended lower.
We suspect that this is primarily due to cyclical factors. In general, younger people have more flexibility around career and work-related decisions. They are more likely to tactically change or adapt their decisions around work when conditions in the labour market change. Tertiary education becomes more attractive to young people when the employment market is soft and thus job opportunities are more limited for school leavers. This has been the case recently.
The middle-aged cohort (25-54 years) comprises those in their 'prime' working age. The participation rate is significantly higher and less volatile for this cohort.
During the past year, the participation rate has fallen marginally for this group and this looks cyclical. It is likely to reflect a small number of discouraged workers leaving the workforce due to a soft jobs market.
Demographic influences mean that the participation rate has peaked and will trend lower over time as the proportion of the population over 65 increases.
In the short term, the recent trend is expected to continue. The aggregate decrease in the participation rate by structural forces is likely to be magnified by the small cyclical impact of a soft labour market.
The combination of these two factors will limit the overall rise in the unemployment rate, which we think is likely to peak at about 6 per cent.
Gareth Aird is an Economist at the Commonwealth Bank, Global Markets Research.
